The modern global economy employs numerous types of contracts that are traded and/or cleared in a multi-lateral environment. For example, participants in exchanges or other markets routinely buy, sell and otherwise utilize futures contracts and futures contract options. Futures contracts and options are commonly used in connection with various agricultural and industrial commodities, in connection with currency exchange, etc.
There are various circumstances under which a party to a typical futures contract might be obligated to make some sort of payment. As but one example, a clearinghouse may require mark-to-market payments on a periodic basis or when the current value of a futures contract is less than a certain percentage of a party's margin account with the clearinghouse. As another example, one party may purchase a contract from another party. Money is also typically paid when a futures contract is settled. That final payment may be based on the final mark of a cash settled contract. The final payment might alternatively be the amount of an invoice for satisfying delivery of a particular financial instrument, commodity, currency, etc.
These and other payments must typically be made in a currency that is specified by the futures contract. A market generally assumes that such payments will be unimpeded by illiquidity in a market for the specified currency, inconvertibility of the specified currency, non-transferability of the specified currency, or other scenarios in which the specified currency might not be readily available. Although exchange rates of various currencies relative to one another may fluctuate, conventional futures contracts typically contemplate an unrestricted availability of a specified currency on commercially reasonable terms.
If adequate supplies of a specified currency are not available, it may be difficult to settle or otherwise make payments in connection with a futures contract. In the context of over-the-counter derivatives traded and carried on a bilateral basis, parties have been known to reach various accommodations on a contract-by-contract basis. For example, two parties might agree that settlement could be made in an alternative manner (e.g., paying an equivalent amount of a foreign currency) and/or deferred until a later date. However, there are qualitative and quantitative differences between bilaterally-traded derivatives and derivatives traded on a multi-lateral basis. Although it is often simple for two parties to work out an accommodation of an unforeseen currency contingency, futures contracts must account for the needs of a potentially large number of market participants.
In particular, futures contracts are typically standardized so as to facilitate selling, offsetting, and otherwise creating a functioning market for a contract of a particular type (e.g., for a particular commodity or for a particular foreign currency). At any one time there may be a large number of outstanding futures contracts of a particular type. Each of those contracts may have very similar terms (e.g., deliver a specified amount of a particular commodity or a specified amount of a particular foreign currency), but may involve different parties. Moreover, various subsets of those contracts may mature at different dates. Even if the parties to each individual contract could agree on an appropriate way to accommodate an unforeseen currency condition, the accommodations would not be uniform across all of those contracts. This would be undesirable, as participants in futures contracts of a particular type should be treated fairly and consistently if a market for such contracts is to function properly.
In some cases, a commodity, futures or other type of exchange can take emergency action that modifies how all existing contracts of a particular type will be settled or otherwise performed. This is also undesirable. Such emergency actions invoke substantial governmental reporting requirements, can undercut market confidence, and can have other detrimental side effects.